Question
In: Economics
Freda consumes two goods, spinach (s) and chocolate turtles (t). Her utility from the consumption of...
Freda consumes two goods, spinach (s) and chocolate turtles (t). Her utility from the consumption of these two goods is given by u(s,t)=10st. The price of spinach is $1, the price of turtles is $1, and Freda has $1200.00 to spend on these two goods.
In the questions below, give all your answers to two decimal places.
t Part 1 (2 points)See Hint Given the initial prices and income, Freda's optimal consumption bundle is composed of 600 units of s and 600 units of t .
Part 2 (2 points)See Hint Now suppose a tax of $1.00 is imposed on chocolate turtles. For simplicity, assume that the entire $1.00 tax is passed on to consumers so that the new price of chocolate turtles is $2.00. This means that Freda's optimal bundle, after the tax is imposed, is units of s and units of t .
Part 3 (3 points)See Hint Now suppose that Freda receives a rebate equal to the amount of tax that she pays. This rebate will increase her income from $1200.00 to $ . If Freda readjusts her consumption bundle, she will now demand units of s and units of t .
Part 4 (2 points)See Hint Let's explore the utility implications of this tax rebate. Given her original optimal bundle, Freda's initial utility was . After the tax is imposed, but then the amount she paid in tax is rebated back to her, Freda's utility is
Solutions
Rahul Sunny answered 2 years agoRelated Solutions
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